By Shahab Sabahi – Energy and
Environment for Development – Research Group
Robert Gordon in his recent paper,
titled “Is U.S. Economic Growth Over? Faltering
Innovation Confronts the Six Headwinds”, challenges the notion
of “indefinite economic growth”. He argues that regardless of cyclical trends,
long term economic growth may grind to a halt. Over two and half century growth
of rising per capita could become a history account. The nutshell of his
argument is that growth has been driven by the genuine innovations which
led to general purpose and resource augmented
technologies. Indeed this growth trend has deeply and broadly transformed human’s
lifestyle.
The paper is deliberately provocative and suggests that fast economic
growth was a one-time thing centered on 1750-2050, and it happened because there
was no growth before 1750. He looks after 2050 or 2100 when there might
conceivably be no growth.
Opponents to Gordon’s view (see M.
Wolf, Financial Times) point out catch-up by
developing nations could still drive global growth at a high rate for long term
and the speed with which innovation is adopted is determined by finance.
Also the advocates of
efficiency improvement argue that growth can still occur as there is massive
potential for productivity improvement. The process of innovation may be
battering its head against the wall of diminishing returns. Indeed, this is
already evident in much of the innovation sector.
It holds true that the
global growth can still be achievable as long as the developing countries markets
can accommodate more consumption, and developing countries allow the
exploitation of their resources. But it should not be necessarily translated to
sustainable and long-term growth.
The opponents miss two
points.
First, inevitably finance
and risk-taking have driven innovation and growth. However, over the two
decades, this risk-taking approach has burdened external costs on societies.
The miserable pain of external costs has gradually been felt by societies. It
could change the risk-taking behavior. Thus so-called innovative finance
instruments also cannot be the utmost source of growth. Second, the share of productivity in boosting growth decreases and accounts average for 15% while the rest, 75% comes from more resource exploitation (Hulten 2001; Jorgenson and Griliches 1967; Young 1995).
Up to now, economies of scale, market expansion, trade and finance, productivity improvement and financial innovation have modestly contributed to growth. But this show cannot go on any more. Externality, limited resources and the sheer size of growth that are needed to sustain the globe expansion, will defuse the traditional influence of trade-finance in growth.
Yes, Gordon’s message is
right; a genuine economic growth needs genuine innovations.
